An Explainer: Unsecured Loans
As the name suggests, an unsecured loan is such a loan which a bank offers a borrower without keeping any collateral. When you go for a home loan, for instance, your property is the collateral against which the bank offers you the loan. In case of a default, the bank has the right to claim the said property. This is why a home loan does not fall in the category of an unsecured loan.
Typically, credit cards and personal loans are considered unsecured loans, while home loans, automobile loans, and loans against property or jewellery come under secured loans. Banks issue unsecured loans entirely on the basis of your creditworthiness. Because there is no guarantee kept against the loan, the interest rates charged are also higher than those for secured loans. Also, unlike a secured loan, you cannot claim tax deductions on the interest that you pay on an unsecured loan.
While many a time an unsecured loan is availed of for personal requirements, there sometimes are cases of people going for personal loans to meet any shortfall in their home loan amount. It is advisable to use savings rather than opting for a personal loan, because you end up paying more in a situation like that.
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